Here is an article featured in November's HRM Asia magazine about my latest research on creating value....
The main constituents of organizational capability are human, organization and social capital. I’m going to be exploring human capital first and will come back to the others shortly.
Human capital exists at individual and organizational levels.
Individual human capital is the value we accumulate and can offer to employers, or sell independently ourselves, based upon our talents, learning and experience. Organizations can acquire, or at least borrow this individual human capital by attracting and selecting staff with the right skills and experience. It can then be developed through learning and development. It also needs to be converted into an organizational resource by aligning people with the business and engaging its owners as investors, so that they will choose to make it available to the organization. Organizational human capital can then be leveraged by applying it to meet business requirements in the organization value chain.
At both individual and organizational level human capital consists of or is built up based on capability (strengths, talent etc), engagement (motivation, commitment etc), health, wellness and mindfulness, and whatever else might be useful to help a business address it needs. But importantly, it’s all about things which are within us and are provided to an organization by individual people. The only aspect of organizational human capital which goes a bit beyond this is diversity though again this is simply based upon the combination of the different perspectives and ways of thinking of the different individuals who work for an organization.
Importantly, human capital is not just another name for people - it is the value these people provide. So you could imagine that might be a group of people who could offer substantial amounts of human capital to one organization which needs the skills etc these people could provide. But the same group of people might provide no human capital to an organization down the road if this second firm doesn’t need the skills these people can provide.
And also important, most of it is fairly intangible. It’s hard to see or to describe never mind measure. Which is what makes it so challenging to manage. Although since we as organizations don’t actually own our human capital anyway (our employees do), you could argue that management is the wrong word anyway, and that all we can do is to create the right environment for our employees to flourish, maximising the amount of human capital they want to invest in us. (See also Herzberg’s satisfiers and motivators.)
Before moving on I wanted to make it absolutely clear organisational capability is a business issue not an HR issue (actually it’s both, I’m just reinforcing how easy it is to speak defensively about HR - see my last post,)
The best evidence for this comes from Scott Keller and Colin Price, authors of "Beyond Performance: How great organisations build ultimate competitive advantage and the reason that it’s important is that both authors and senior consultants at McKinsey.
This is the way McKinsey describes their concept of organisational health / capability:
“The pace of change is faster than ever, so organisation’s ability to adapt is more crucial than ever. Furthermore, information is so readily available that most aspects of any organisation’s competitive advantage can be fairly easily copied by competitors. What can’t be so easily replicated is the ability to grow from within through better ideas and better execution, ie better health. This is why the authors call organisation health ‘the ultimate competitive advantage’. And healthy organisations’ success isn’t in business alone: They serve a greater good, enabling workers to unlock their full potential in the workplace.”
And see this video with the authors, and note their quote that:
“Performance is very much about our strategy, the big goal we’re going for that we can measure in financial terms, the set of initiatives we’re going to go after, the sales force stimulation programme, the lean production programme, whatever bundle of things they’re going to do in order to get to those numbers,
The health side is very much about me - how well do we align people on where we want to go, how efficiently do we execute against that, and how effectively, and how do we renew ourselves along the way, keep our energy up and be able to continue once we even get to that target.”
Organisational health is organisational capability and it’s not just HR saying that it’s important - the premier firm of strategic business consultants says so too.
Putting people at the centre of business strategy has a number of interesting consequences, One of which is that we need to change our language. Whilst Finance was the centre of master of business it made sense that business language was mainly financial. Now people are the centre of business we need a more human way of speaking.
And actually it's a bigger issue than this - my guess is that the whole new S curve isn’t so rooted in financial and quantitative disciplines and language as the old one.
Gary Hamel provides this slide as an example. His bet is that one reason engagement in so many businesses is so low is down to the style of language that we use. Not that there is anything specifically wrong with words like differentiation and excellence (and I know I use them all the time), it's just that they're fundamentally not that compelling. So how about we change some of the words on the left for some of those on the right - the sort of language that has spurred humanity to great deeds over the centuries. Wouldn't that provide a positive impact on engagement finally.
I also like the way that David Whyte describes it:
"The inherited language in the work world is far too small for the kind of mythic drama that occurs there everyday, and we need a language that commensurates with the drama of work. I do think that most companies are like Shakespeare plays written large with dramatic entrances and exits, midnight assassinations, noble speeches while the grave diggers are telling it as it is, and every epoque ends with a lot of blood on the floor."
It’s not that all organisations need to start talking about love, though personally I think that would be fantastic, it’s just that we think about our language and adjust it in our attempt to make our organisations a bit more people shaped.
I think there’s a particular issue for HR in that we tend to dress things up to make them more like the rest of the business, eg ‘it’s not an HR initiative, it’s a business programme’, or ‘we need to get a business sponsor for this HR project’.
Do we really want to make our case for the future of people management using the type of language that’s in use today, and perpetuate the old S curve, or do we focus on educating the rest of the business using this new, qualitative, people focused language, to help them move onto the next one?
This is a bit of a summary of my earlier posts but I think it is still worth spelling out. People are the centre of business strategy, not just the means to implement it.
It's an important distinction. I think most progressive businesses have got the point that people are their most important resource but I still come across a lot of them who translate that into yes, people are important, because if we don't treat them right they won't implement our business strategy once we've developed it. This sees people as wheel or in a well oiled machine. But I think this largely misses the point. People aren't just important for implementation they're important for the strategy itself.
People are now the most important basis for business strategy, it's as simple as that. If you've not read my posts on creating value or on organisational capabilities then please do. Or come back on Wednesday and read my post on McKinsey's organisation health (these days it's not just HR which is saying people are the centre of business strategy.)
By the way, a consequence of this insight is that HR processes are the most strategic business processes in a firm, and that HR is the most strategic function - and definitely not just a support function!
Picture credit - SomeDriftwood
If we want to achieve competitive advantage through our people then we need to create value.
Adding value is still about supporting the rest of the business to achieve competitive value through aspects available in the rest of the business (products and services, customers, business processes, technology etc). But if we are supporting the rest of the business then we are still fundamentally acting as a support function.
Most of what's written in HR magazines and presented at HR conferences about HR being more strategic is complete gumph or at very best is really just about us being more proactive. Ie it's about being involved at 'the table' and consulted early about important business changes, but it's still about opportunities in the rest of the business, and HR supporting these.
It is only when we get to creating value that HR acts as the basis of competitive success for a business and it's only then that we have a fully strategic agenda too.
Creating value is of course is an additional reason why we should focus on outcomes - if we only think about activities and business impacts it's going to be much harder to be able to spot, and then go to other business leaders and explain the additional value that HR can provide.
There are a variety of ways in which HR can create value but the main one, at the organisational level at least, is creating organisational capabilities.
Ed Lawler adds some useful detail to the definition of this type of creating value, suggesting that the strategic part of HR’s role needs to be bifurcated again, splitting into business partnering and above that, organisational effectiveness - contributing to business strategy based on considerations of human capital, organisational capabilities, readiness, developing HR practices as strategic differentiators.
But creating value doesn't always need to act at this strategic, organisational level. It can be something each HR professional does within their own role too, for example by spotting the opportunity to bring a wonderful talent into the organisation, even if there isn't a specific opportunity available at that time; or using a one-off development opportunity to leverage someone's potential, even if this involves throwing someone in at the deep end.
In fact, whilst the steps in the HCM value chain are very clearly distinguished, the levels in the value triangle are much more blurred - it's often difficult to be clear whether something is adding value or creating value etc, and it's generally not that important either. They critical thing is that each function and practitioner always thinks about how they can generate more value within what we do. Eg if we're asked to do something which is adding value, we need to be asking ourselves how can we do that and create some value at the same time as well?
The value triangle defines the value that HR can provide building up from lower value at the base of the triangle to higher value towards the apex at the top. This build upwards is important - if HR does not provide basic value at the base of the triangle it is much more difficult to provide value at the top. However if HR only provides value at the bottom it has largely missed the point.
The bottom level is value for money. Value for money refers to basic, largely tangible value that may represent increased efficiency; incremental improvements in effectiveness; meeting compliance requirements or other basic standards. It is useful value but is not necessarily about meeting business objectives or providing customer satisfaction.
Adding value is about improving effectiveness and adding capabilities which will have a clear impact on business results, including operational processes, customer satisfaction and financial success. This level of value comes from focusing on the business; understanding the business; talking the language of business ie Finance (currently at least) and even being a business person first, HR person second (I'll have more to say on that later.)
The needs of the business can then be translated back up the value chain - creating outcomes which will support these impacts, and activities that will create the required outcomes.
Creating value is about finding new possibilities to help a business achieve more of its existing business objectives; new business goals or to transform the way the business works and to create new opportunities for competitive advantage. The principle of creating value is that continuous improvements are no longer enough - created value capabilities are needed to surprise competitors and change the nature of the competition.
Creating value comes from focusing on people and the culture - on the capabilities and engagement of the workforce which could help the business achieve even more, or on the potential of the workforce which could lead to new capabilities and then to helping the business achieve more. It rests on an understanding of people and culture and so the key skills come from psychology, sociology and anthropology.
So creating value is about reversing the causality in the organisation / HCM value chain. Adding value was about understanding the business needs and then aligning HR outcomes and activities back down the value chain with these needs. Creating value is about understanding the potential HR outcomes and then looking further down the value chain to add in the additional business opportunities these outcomes can provide.
Here is a summary of the story so far:
Changes in work, the workforce and the workplace
HR and competitive advantage
And this month’s articles:
Competitive positioning / blue ocean strategy
Differentiation, trade offs and best fit
One of the major challenges faced by HR in developing its credibility is showing that it is accountable.
As shown in the graph, taken from McKinsey's 2008 of their 1998 War for Talent report, the fact / perception that we are not accountable for anything important in a business is one of other business leaders' major grips about the function.
It's also easy to see how we have got to this situation - HR is obviously accountable for the quality and effectiveness of HR processes but nobody cares very much about that. More important is the use of these processes, but it needs to be line managers who are accountable for the bulk of this. There's also a need in most businesses to strengthen line managers' accountability for the operation of these processes, which often makes HR wary of taking accountability for HR in case this further reduces the accountability that line managers are taking.
HR is also clearly not accountable for business results (though we do play a role as a support function in helping to produce them.). So if we only focus on activities and business impacts we very naturally end up not taking accountability for anything important, and hence how we have got to where we are.
Outcomes give us a way to square the circle - to take accountability for something important - and actually the most important competitive resource most businesses have at their disposal ie the quality of people and culture, and in particular of organisational capabilities.
I've already referred to the differences between an HR function which talks about activities and one which emphasises outcomes. Well the differences with an HR function that focuses on and takes accountability for outcomes is even more pronounced. For example think about the likely perception and credibility of an HR function which talks about the number of training courses it's running and one which takes accountability ie puts its neck on the line for developing certain difficult to find / train competences in its sales force, or for improving engagement levels by say 5%.
Note that I'm not talking about responsibility - it's still line managers who are responsible for creating the required human capital in their teams. But we can, and I believe we should, take accountability for providing the main and most strategic human capital that our businesses need.
Another benefit of focusing on outcomes is that it helps raise our credibility. People who create something are always seen as more valuable than people who just do something, especially if this is just to shuffle paper (even i-paper.)
The same applies to HR - we will be seen a more impact full if we talk about raising commitment or the skills of our sales forces, than if we talk about running communications briefings or training courses.
We need to focus on outcomes because that makes it more likely that we will talk about outcomes too.